Housing Bubble, credit bubble, public planning, land use, zoning and transportation in the exurban environment. Specific criticism of smart growth, neotradtional, forms based, new urbanism and other top down planner schemes to increase urban extent and density. Ventura County, California specific examples.

Sunday, December 02, 2007

Stop Paying Your 2nd Now

I'm serious. The time has come to take the plantation back from the masters. Just because I find the moral hazards the current lending crisis has introduced to be excrementitious doesn't mean I don't see it as a great opportunity. If you have a recent 1st & second and the value of your home is near or less than the value of your 1st mortgage lien then stop paying your 2nd now. Why? Simple. You will make gobs of money with no consequences. Really, what are they gonna do? foreclose? Not hardly. they'd have to spend thousands and thousands only to end up OWING the 1st trust deed MORE than the house is worth. Isn't this great? Then, debt discharged, expenses lower take the paperwork to the county assessors office and have your tax bill likewise reduced by the same of even larger amount. Win-win as our dear departed scamboi used to proclaim. Remember the rulez. Don't sign anything, they'll try to do to you what Countrywide did to Casey and convert a worthless 2nd to a personal debt that survives bankruptcy. Gosh, I wonder if they'd be interested in selling that $50k note to me for $500? I'd put a garnish on his wages for a bit of sweet passive income. Second, stretch things out as far as possible. Lead them on. Part of the plan is to turn this into a movement and hopefully you'll just get lost in the flood. The longer things go unaddressed the less likely it is in their interest in going after any phantom equity. Now here's phase 2. For a few people following my plan the 2nd lien holder may start actually pursuing foreclosure. By this time you've got a tax bill and you've crushed the neighborhood comps and hopefully your neighbors have joined the plan. If the lender is dead set on forcing themselves to take a huge financial hit then it is time to negotiate. You've saved 6-8 months of "their" payments and you've gotten a break on your taxes; a gift that keeps on giving. Offer them the deal to resume payments at a discount. Have them rescind penalties and accruals and you agree to resume paying on a balance half the previous outstanding.

12 comments:

The No. 1 thing to look out for, Gormley tells me, is the car. "A BMW 3 series." The cheapest luxury lease you could get. "It's always a 3 series."---I force the conversation to plod on. "What brings you here?"

"Birthday party for my friend," he explains. More silence. I ask him what he does for a living.

"Mortgage banking." Riveted as I am by our conversation so far, I'm anxious to get to what I need to know: Is he or isn't he a $30,000 millionaire? I reveal that I'm a journalist, writing about nightlife in Dallas. Is he familiar with the $30k-ers?

"You're really cute."

I thank him for his time and head to the bar.---

Back to the subject at hand, I'll wager that more than half of those with seconds in bubble areas won't have any choice but to quit paying. They didn't have enough money to begin with, and now that the HELOC source has dried up the house of cards is going to collapse regardless.

absolutely. our money masters have already decided it is in their best interests to stop paying the rates and returns they promised to their lenders. they've successfully lobbied for higher inflation, subsidized borrowing for them, higher taxes and fewer options for us. clearly there is no social contract explicit or implicit that remains intact. so it is time to start thinking like the lenders. screw responsibility grab what you can. i am serious here. anybody who is paying a second on a house worth less than the first is foolish in the extreme.

The employee of mine mentioned in an earlier thread has evidently decided to stop paying both the first and the second bagholders, and is convinced she can eventually get the first back to a rate she can pay and get the second balance down substantially - maybe even to zero.

We'll see.

Disclosure - I am giving her no advice on this whatsoever. She is working with a "loss mitigation" pro of some sort.

People still wait for me to crack a smile and deliver a punch line on this subject. I'm serious, stop paying any second liens. The money is worse than wasted, it only encourages more banking fraud. Stop the fraud, stop paying. make them be on the receiving end of the moral hazard they created. And if they make noises about "fraud?" Say you are ready to cooperate with the authorities. Right now. call them in. Oh, and make sure you send letters out to all the bundle investors informing them that because of the fraud the loans are rescinded and will be repaid at par just like in the investor packet.

I've seen some rough analysis elsewhere that says some 15% or less of the ARM loans out there would be helped by a teaser freezer. This is all part of the plan to keep hope alive while squeezing the blood from the stones.

New York's attorney general this week sued a major real estate appraisal company for allegedly colluding with Washington Mutual to inflate the value of thousands of homes, the first strike in a widening investigation of allegedly fraudulent practices that contributed to nationwide troubles in the housing market.

@Edgar,Have you checked out all the sweet finds on your toilet blog today? It might make you feel a bit better. Speaking of things that suck, there must be a picture of Dick Cheney on the pot somewhere...

Rob: "People still wait for me to crack a smile and deliver a punch line on this subject. I'm serious, stop paying any second liens."

I'll take the opposite side. Just because lenders have ignored credit histories and have misused credit ratings in the past doesn't mean they won't do so going forward. The finance industry needs credit to work, they are not going to simply abandon it, and as such are going to restructure the rules of the game.

That means that at some point, credit history will matter again. The common "wisdom" is that so many people have, or will, default on so much debt that it won't matter. Nonsense. Quite the opposite, the people who have scarred their credit won't be looked at twice by lenders. And not just lenders, but anyone who pulls a credit report, including insurers and potential employers.

As I said, they are going to have to figure out how to make credit work again, and one of the easiest ways to do so will be to put together "naughty" and "nice" lists, and simply flat-out deny credit to anyone who is a risk. Once they've made that cut-off--removing the Casey Serins and the Jeff from San Diegos from the list--the numbers improve dramatically and lending once again becomes a profitable venture.

Add to the the credit snoopers list, your insurance company. They look at your credit history to see how stable and upstanding you are.

The lease on the beemer was bad enough. Wait till the insurance goes up 50%

Me thinks the pain will be around for a while for a lot of chuckleheads.

Privledged yuppies in their 50s with zero savings, living in a apartment and driving their clapped out infinity while the "stupid" immigrant who used to make their double mocha at the local convience store each morning is living in their old home and driving new toys.

PV,I don't think so. You remember Tanta saying that it is hard to make money on the very best borrowers? They are fickle, don't pay late fees or penalties, rate shop, drive hard bargains, etc. The lenders need lots of borrowers of all types so they can structure their lending for maximum returns. Good/Bad lists won't work especially when right on the edge of good/bad is going to be so very profitable. Bracket creep will be rapid and we'll be back to spectrum lending in no time. There just aren't enough good potential borrowers to limit your universe to them. No, I think what will happen will be a kind of "do over" or as I dubbed it a "financial mulligan."

Face it, next time say 3-4 years from now after our theoretical FB has stopped paying their second they go into the auto dealer to buy. The credit manager asks about the "discharged debt" black mark. The FB says they stopped paying their second because there was no equity and the loan was worthless. Instead the FB explains they used the savings to keep current on all other debts and taxes. The manager ponders for all of 3 seconds, slaps the FB on the back and says smart man! Welcome to our Toyota family, enjoy your new car!

h simpson,Insurance is about to get real mean and real weird. they charge low rates because they live off the investments they make with your payments until they need to pay out. Big piles of loose cash with a known rate of pay outs? Gee, you think they leveraged and invest in risk instruments and such? With the freeze up in mark to market the only place they can turn without some real nasty sh¡t is higher premiums. With all the liquidity and company balance sheet cash equivalents out there expect businesses to turn to self insurance and other creative protections.